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Standing against black money; ASSOCHAM urges Govt for relief to SMEs, trade
Nov 18,2016

Assuring the Prime Minister Mr Narendra Modi of India Incs full support in the fight against black money and corruption, the ASSOCHAM said though the short - term hardship would lead to long-term cleaning up of the economy, some immediate relief should be considered for the industry, SMEs and the trade.

The ASSOCHAM reiterated the full industry commitment to join the Prime Minister in his determined fight against black money and corruption and several initiatives in the past with regard to income disclosures and foreign money have all been received well by all the right thinking people.

Suggesting a number of relief measures to deal with the current situation, the ASSOCHAM said the Non-Banking Finance Companies (NBFCs) should also be allowed to accept old notes till December 31, subject to certain safeguards like crediting the amount only to the borrowers accounts and strict adherence to the money laundering laws.

It said the weekly limit of Rs 50,000 per week from the current account is too meagre. Besides, banks are not clear about it as yet and several of them are not implementing the current account limit. The small and medium enterprises, which employ casual labour on a big scale should be provided a special dispensation.

n++A limit can be fixed according to size of the sales turnover of a company and depending on the sectors,n++ the ASSOCHAM said.

Even though India Inc itself operates in the organised sector of the economy which is connected electronically or through banking transactions like cheque payments, it has strong linkages with a large part of the unorganised sectors including agriculture, casual labour, transportation and other services.

Likewise, for the entire distribution chain for the items of mass consumption, the value chain from the retail to the large distributors is not totally cheque or electronically payment driven.

n++The government may consider extending the same facilities as are being given to state-owned petrol pumps and cooperative stores for temporary trade in Rs 500 and Rs 1000 notes, subject a ceiling of Rs 5,000 per customer who will leave a proper ID with the retailers. Besides, the traders can also be asked to maintain strict stock details with fool proof system against back-dated transactions and other misuses. Considering the limitations of the Income Tax Departments, the staff of the state governments and other Central departments can be deployed with a provision of strict penalties on any misuse,n++ the chamber said.

It said, the chamber has also received queries from its members regarding exchange of currency by NRIs. n++Can they exchange notes from the branches of Indian banks branches operating overseas as well as from the other international banks.n++

The ASSOCHAM reiterated full industry commitment to join the Prime Minister in his determined fight against black money and corruption and several initiatives in the past with regard to income disclosures and foreign money have all been received well by all the right thinking people.

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PGCIL Seeks US$ 1,000 Million Loan for Green Energy Corridor From ADB
Nov 18,2016

Power Grid Corporation of India (PGCIL) has sought a loan assistance of US$ 1,000 million from the Asian Development Bank (ADB) comprising of Sovereign guaranteed loan of US$ 500 million and Non-Sovereign loan of US$ 500 million.

The Loan would be utilized for funding of the following transmission projects including a project under Green Energy Corridor projects in next 3-4 years:

(i) HVDC Bipole link between Western Region (Raigarh, Chhattisgarh) and Southern Region (Pugalur, Tamil Nadu) - North Trichur (Kerala) - Scheme 1: Raigarh-Pugalur 6000 MW HVDC System.

(ii) HVDC Bipole link between Western Region (Raigarh, Chhattisgarh) and Southern Region (Pugalur, Tamil Nadu) - North Trichur (Kerala)- Scheme 3: Pugalur- Trichur 2000 MW VSC based HVDC System.

(iii) Real Time Measurement/ monitoring scheme.

(iv) Inter State Transmission System (ISTS) associated with Green Energy Corridor as under:

a) Ajmer(New) - Bikaner (New) 765 kV D/c

b) Bikaner(New) - Moga (PG) 765 kV D/c

c) LILO of one circuit of 400kV Bhadla- Bikaner (RVPN) line at Bikaner(New)

d) Establishment of 2x1500 MVA, 765/400 kV S/s at Bikaner (New)

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Inclusion of Large Hydro Power Projects Under the Ambit of Renewable Energy
Nov 18,2016

The Ministry of New and Renewable Energy (MNRE) is examining the prospects of including all hydro power projects under Renewable Energy Sector. Hydro power can be called renewable energy because it uses water for generation of electricity without any consumption and leaves this vital resource available for other uses.

The norms of Small Hydro Power Projects (SHP) differ from country to country. In some countries station capacity with more than 25 MW is classified as SHP, example- Brazil -30 MW, Canada-50 MW, China- 50 MW, Pakistan- 50 MW, Vietnam- 30MW and Eastern Europe / Russian countries - 30 MW. The implementation of Hydro Power up to 25 MW station capacity was brought under the ambit of Ministry of New and Renewable Energy from Ministry of Power during 1999.

Government has set the target to reach 175 GW of Renewable Energy capacity by the year 2022 which includes 5 GW from Small Hydro (up to 25 MW station capacity). So far larger hydro plants are not considered as Renewable Energy. In case of large hydro capacity (above 25MW) being added to the renewable category, Indias Renewable Energy capacity could reach 225MW.

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Launch of online portal for facilitating trade between India and Iran
Nov 17,2016

An Online Portal for facilitating trade between India and Iran was launched by Dr. Inder Jit Singh, Additional Secretary, Department of Commerce in the presence of H.E. Mr. Gholamreza Ansari, Ambassador of Islamic Republic of Iran, Mr. Khaleel Rahim, CMD, STC, and other Directors of STC. The Hind-Iran portal (hindirantrade.org) is a joint initiative of STC and Douman Queshm, Iran. The objective of the trade portal is to disseminate information relevant to Indo-Iran Trade, and to provide an e-marketplace for the buyers and sellers of the two countries.

Addressing the gathering at the event, Mr. Khaleel Rahim said that Iran and India have enjoyed deep social, cultural, economic and political connections and relations that have enriched both countries. The two countries have grown closer in the turbulent times at the peak of the economic sanctions against Iran, when it was India which emerged as a valuable trading partner of Iran. The portal is aimed at bridging the communication divide which the business communities face, and which are very interested in trading with each other. Mr. Gholamreza Ansari also acknowledged India as a friend who stood by Iran in tough times, and supported this initiative.

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Approval for Flexibility in use of Domestic Coal
Nov 17,2016

The Government has approved a proposal to create flexibility in the use of domestic coal.

Further, the Minister informed that the Cabinet, on 4th May, 2016, approved the proposal of the Ministry of Power for flexibility in utilization of domestic coal for reducing the cost of power generation.

As per the policy, the Annual Contracted Quantity (ACQ) of each individual coal linkage (as per respective Fuel Supply Agreements) are to be aggregated as consolidated ACQ for each State or the company owning the Central Generating Stations (CGS). For such consolidated ACQ, a Supplementary agreement shall be signed for each State/Company owning the CGS.

The mechanism envisages to reduce the cost of power generation by using coal in an optimal manner depending upon the efficiency of the generating stations. Central/State generating companies may utilize coal in its own generating stations by considering various factors such as operational efficiency of the generating stations, transportation logistics/ feasibility depending upon location of generating stations, fixed variable charges including transportation cost, relative merit order dispatch of power etc.

There shall be a flexibility, in the revised arrangement, for use of such coal amongst the generating stations of the state owned utilities, plants of other state power utilities, company owing the Central Generating Stations and Independent Power Producers, amongst each other as per the methodology issued by CEA.

A methodology for implementing the above proposal has been prepared by a committee consisting of the members from Ministries of Power, Coal and Railways, CERC, NTPC, CIL, POSOCO in consultation with the stakeholders. This methodology has been issued on 8th June, 2016.

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UDAN to promote Regional Connectivity
Nov 17,2016

The Ministry of Civil Aviation (MoCA) launched the Regional Connectivity Scheme (RCS)-UDAN in October, 2016, to promote regional air connectivity in the country including North Eastern region and creating additional infrastructure by revival of unserved and underserved airports/airstrips. The scheme has been finalized after extensive consultation with all the stakeholders including State Governments. Suggestions were received from stakeholders including the states at the time of consultation with public/stakeholders on the draft Scheme.

The indicative list of underserved and unserved airports in India of the Scheme also includes Defence airports. However, for such airports, approval from Ministry of Defence needs to be obtained for permitting joint use/civil operation under the Scheme.

The primary objective of RCS is to facilitate / stimulate regional air connectivity by making it affordable. Promoting affordability of Regional air connectivity is envisioned under RCS by supporting airline operators through (i) concessions by Central Government, State Governments and airport operators to reduce the cost of airline operations on regional routes and (ii) financial support (Viability Gap Funding or VGF) to meet the gap, if any, between the cost of airline operations and expected revenues on such routes. RCS-UDAN is a demand-driven scheme, where airline operators undertake assessment of demand on particular routes.

A Regional Connectivity Fund (RCF) has been created under powers conferred under Rule 88-B of the Aircraft Rules, 1937 to provide the VGF requirements under the scheme. The Central Government has decided to impose a levy on the scheduled flights being operated within India to fund the Regional Connectivity Fund. However, following flights has been exempted from the above mentioned levy:;

i) Flights operated on CAT II/ CAT IIA routes as specified in Route Dispersal Guidelines issued under Rule 134 (1A).;

ii) Flights operated on RCS routes.;

iii) Flights operated with aircraft having maximum certified take off mass not exceeding 40,000 kg.

The payment of VGF will be made to selected airline operators from the RCF.

For imposing levy, amendment was done after consulting all stakeholders. Observations/ comments from different stakeholders including Federation of Indian Airlines (FIA) were considered before amending the rule ibid. The Ministry has signed MoU on RCS-UDAN with the states of Mizoram, Puducherry, Uttarakhand, West Bengal, Assam, Jharkhand, Madhya Pradesh, Maharashtra, Andhra Pradesh, Gujarat and Chhattisgarh. A pre-bid meeting was held on 11-11-2016 with all the stakeholders including states and airline operators to facilitate the effective and efficient implementation of the scheme.

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Nagpur Metro gets Euro 130 million AFD credit
Nov 17,2016

Nagpur Metro achieved financial closure of the project by securing a credit of Euro 130 million from AFD (French Development Agency).

A Credit Facility Agreement in this regard was today signed between the Department of Economic Affairs, Ministry of Finance and AFD. Shri Selvakumar, Joint Secretary (DEA) and Shri Nicolas Fornage, Regional Director for South Asia, AFD signed the agreement in the presence of French Ambassador Shri Alexandre Ziegler.

The 20 year period credit with a moratorium of five years, will be used for funding Signalling, Telecom, Automatic Fare Collection Systems and Lifts and Escalators.

Earlier, in April, 2016, Government of India signed a loan agreement with KfW Germany for 500 million Euro for Nagpur Metro.

With todays credit agreement, Nagpur Metro which was incorporated in February,2015 and commenced civil works in May last year has achieved financial closure in a record 18 months. Order for rolling stock has already been placed and tendering of other packages for power supply, traction systems, signaling, telecom, automatic fare collection system etc., are in advanced stages.

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The Central Government decides to reduce the limit of exchange of old Rs 500 and Rs 1000 notes across the counter in banks from Rs 4500 to Rs 2000
Nov 17,2016

In the aftermath of the cancellation of the legal tender character of the old Rs. 500 and Rs. 1000 notes, the Government of India has been receiving several suggestions including those from the State Governments. The Government has considered various suggestions and the following decisions relating to certain operational aspects of this scheme have been taken:

i. We are now at the beginning of the Rabi season. The farmers need various inputs for their agricultural activities. While the Government is keen on promoting payment through the banking or digital system, it is felt necessary to make some quantum of cash available with farmers to meet various expenses in connection with agricultural operations. It has, therefore, been decided that farmers would be permitted to draw upto Rs. 25000/- per week in cash from their KYC compliant accounts only. These cash withdrawals would be subject to the normal loan limits and conditions. This facility will also apply to the Kisan Credit Cards (KCC).

ii. Farmers are currently selling their produce from the Kharif season in the APMC markets/mandis. The farmers who receive such payments in their bank accounts through cheque/ RTGS will be permitted to draw up to Rs. 25000/- per week in cash. These accounts will have to be KYC compliant. This facility will enable the farmers to meet their various expenses connected with agriculture. This will also infuse lot of liquidity into the rural sector.

iii. Traders registered with APMC markets/mandis will be permitted to draw up to Rs. 50,000/- per week in cash from their KYC compliant accounts as in the case of business entities. This will enable these traders to pay wages and facilitate easy loading, unloading and other activities at the mandis.

iv. For payment of crop insurance premium, States fix time limits depending on their local requirements and conditions. Consequently, the last date for payment expires on different dates. It has now been decided to extend the last date for payment of crop insurance premium by 15 days.

v. While encouraging families to incur wedding expenses through cheques or digital means, it has been decided to permit families celebrating weddings to draw up to Rs. 2,50,000/- in cash from their own bank accounts. These accounts have to be necessarily KYC compliant. The amounts can be drawn only by either of the parents or the person getting married. Only one of them will be permitted to draw this amount. This limit of Rs. 2,50,000/- will apply separately to the girls family and the boys family. The person drawing such amount has to furnish the PAN details. Further, a self-declaration will have to be submitted by the person to the effect that only one person from his/her family is drawing the amount. It is expected that members of the public will fully cooperate to ensure that the above guidelines are adhered to. Any misuse of this facility will invite appropriate action based on the self-declaration and other details.

vi. At present, over the counter exchange of old Rs. 500/- and Rs. 1000/- notes is limited up to maximum of Rs. 4500/- per person. Reports have been received that the same persons are going back to the counter again and again, thereby cornering the facility and depriving many other people from exchanging old notes. There are also reports of organized groups indulging in such practices to convert their black money into white. It is now expected and desirable that people put their old notes into their bank accounts. However, for convenience of the people who may be on temporary visit either for work or otherwise, it has been decided to reduce this limit of exchange of old Rs. 500/- and Rs. 1000/- notes across the counter in banks from Rs. 4500/- to Rs. 2000/-. This facility will be available only once per person. The reduced limit of Rs. 2000/- will take effect from 18th November, 2016.

vii. Central Government employees up to Group `C including equivalent levels in the Defence and Para Military Forces, Railways and Central Public Sector Enterprises will be given an option to draw salary advance up to Rs. 10,000/- in cash. This amount will be adjusted in their salary for November, 2016. It is expected that this decision will ease the pressure on the banks.

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476 km of National Highway Projects approved by SFC
Nov 17,2016

National Highway projects worth Rs. 6067.9 crores and totalling 476.386 km were cleared by the Standing Finance Committee on 15 November 2016. These projects are in the states of Manipur, Nagaland, Arunachal Pradesh, Maharashtra, Goa, West Bengal, Uttarakhand and Uttar Pradesh. The details are as follows:

S.No.StateTotal length (in km)Total Project Cost (In Crores rupees)ModeDetails1.Manipur47.68230.46EPC

Strengthening 2-lane pavement with paved shoulder on a section of NH 39

2.Manipur27139.87EPC

Strengthening of 2-lane pavement with paved shoulder on a section of NH-39, (Mao- Imphal Section)

3.Nagaland27.3461.82EPC

Improvement of city portion of Dimapur& Kohima of NH-39

4.Arunachal Pradesh10.9341.83EPC

4-laning of NH-415 (Itanagar to Banderdewa Section)

5.Maharashtra41.617484.15EPC

Upgrade to 2-lane with paved shoulder of Gadchiroli Gô Mul section of NH-930

6.Maharashtra39.674162.34EPC

Upgrade to 2 lane with paved shoulder of Mul-Chandrapur section of NH-930

7.Goa11.9354.43EPC

Construction of Margaon Western NH Bypass for NH 17 (New NH-66)

8.Maharashtra86.8722028.91Hybrid Annuity

4/6 laning of Aurangabad-Telwadi section of NH-211 (New NH-52)

9.Maharashtra67.2311278.88Hybrid Annuity

4/6 laning of Bodhre-Dhule section of NH-211 (New NH-52)

10.West Bengal53.472143.34OMT

4-laning of Kolaghat to Haldia section of NH-41 with ROB cum Flyover

11.Uttarakhand27.18232.81EPC

Reconstruction with geometric improvement of 2 lane to 2 lane with paved shoulder of a sections of NH-125

12.Uttar Pradesh35.56209.1EPC

Rehab and upgrade Barhani-Kataya Chowk near Shohratgarh section of NH-730

Total476.3866067.9

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Mumbai Port Trust proposes to develop Land and Waterfront
Nov 17,2016

Mumbai Port proposes to develop its land and water front. It has about 752 HA of land in Mumbai city and its nearby areas. Out of this about 200 HA are used for port operations. About 500 HA of land is proposed to be developed with a mix of port operations, business, office, commercial, retail, entertainment, community projects and convention centres, etc.

The proposed projects would also include renewable energy and waste water recycling, creation of spaces for community recreation and engagements, maritime museum, marinas etc. Mumbai Port has already invited global tender from eligible national/international consulting firms for n++Appointment of Consultant for Planning, Design and Program Management Support for Master Planning and Infrastructure Design of the Mumbai Portn++.

Government of India had set up a Committee under Chairmanship of Smt. Rani Jadhav for preparing a road map for development of Ports water front and land. The Committee has submitted the report. The report is under examination in the Ministry of Shipping.

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Gartner Says India Software Market to Grow 12.8 Percent in 2017
Nov 17,2016

India software revenue is forecast to total $5.8 billion in 2017, a 12.8 percent increase from 2016 estimates of $5.2 billion, according to Gartner, Inc. This is in comparison to Gartners forecast for 2017 global spending for enterprise software will be $357 billion in constant U.S. dollars, with growth of 7.2 percent over 2016.

Emerging digital business strategies are changing enterprise organizations buying behaviors in India and accelerating the demand for technology innovations and outcome-based solutions, said Bhavish Sood, research director at Gartner. New ways of monetizing the value being delivered, such as revenue-sharing models, are also evolving.

The computer software and hardware vertical had a foreign direct investment (FDI) inflow of $5.9 billion during the period from April 2015 to March 2016. This is an increase of nearly 150 percent, compared to the same period last year. Gartner expects these investments to gather further momentum toward the end of 2016. Make in India is set to boost the manufacturing sector, as well as make it easier to attract investment, and Digital India is focused on creating digital infrastructure, digital delivery of services and increased digital literacy.

Infrastructure software spending in India is projected to surpass $3.4 billion in 2017, a 10.2 percent increase from 2016. Enterprise application software spending is forecast to grow 16.8 percent in 2017.

Indian CEOs want IT to move from the back-office to driving revenue. Aggressive digital business strategies are putting pressure on CIOs to have a direct impact in business outcomes like growth, customer experience and profitability. CIOs are being asked to increase the business value that IT is able to deliver, and equally important, to quantify it, said Mr. Sood. The CEO and business management wants IT to move from a predominantly back-office focus to become a front-office centric organization that directly impacts business outcomes like growth, customer experience and profitability. This is often in the context of an aggressive digital business strategy within a growing number of enterprises.

At Goa this is the year of the focus is on the execution or implementation of digital business strategy, along a journey that has been four years in the making. Starting with the Nexus of Forces at Symposium four years ago - the foundation for todays digital business - we move to a strong focus on the how of putting a digital business together in this years Symposium.

Key elements of enabling infrastructure like the digital business platform will be unveiled this year, which will enable CIOs to create the right foundation to support the business agility required in a rapidly evolving digital business environment.

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Cooperatives can Play a Very Important Role in Creating Job Opportunities in Rural Areas: Radha Mohan Singh
Nov 17,2016

The Union Agriculture and Farmers Welfare Minister, Shri Radha Mohan Singh has said that cooperatives can play a paramount role in creating employment opportunities in rural areas. .Cooperatives related to dairy have proved this while creating employment opportunities in plenty. Shri Radha Mohan Singh said that cooperatives have made themselves prominent in every walk of life and through the vast network of cooperatives about 100 million people have benefitted with opportunities of employment throughout the world. The Minister of Agriculture was speaking at a conference of the 12th International Cooperative Alliance (ICA) - Asia Pacific Regional Assembly and 9th Cooperative Forum.

The Minister added that the Government of India has launched a number of schemes of paramount importance under the guidance of Honble Prime Minister, Shri Narendra Modi. Shri Singh said that cooperatives can play a vital role in implementing schemes such as Toilets in Schools, Jan Dhan Yojana, Swachh Bharat Abhiyan, Pradhan Mantri Krishi Sinchai Yojana, Make in India, Soil Health Card because it has large network spread in the remotest areas as well as in villages. The Minister further said that government has put a strong thrust on the creation of employment opportunities related to skills. As nearly 65% population of the country is below 38. Keeping in view this sort of scenario the cooperatives can play a very important role in creating the opportunities of employment as well as access to rural areas.

Shri Singh opined that ICA Asia Pacific Regional Assembly has sustained development for all, which is very much consistent with present perspective. This corresponds to the sustainable development agenda 2030 of the United Nations which has put a special thrust on reaching the target of sustainable development comprised of poverty abolition, health services, employment creation and check on climate change.

Shri Radha Mohan Singh further said that there are more than 6 lakh cooperatives in the country. The membership of them has gone up as the 2491.20 million. These cooperatives have made the cooperative movement as the largest movement in the world. These cooperatives are working in the regime of fertilizers delivery, sugar production, handlooms as well as retail sector. The cooperatives sector imparts self employment to 17.80 million people and cooperatives related to fisheries, labour, handlooms and gender cooperatives have played very important role in bringing improvement in social economic condition of the weaker sections of the society. The cooperatives related to dairy sector have made the country self dependent by realizing n++White Revolutionn++. Housing cooperatives have provided facilities of accommodation to the weaker section of the society at reasonable price.

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Resolution of more than 100 cases under MAP and Agreement on terms and conditions of First ever Bilateral APA involving India and USA
Nov 17,2016

The Bilateral Competent Authority Mutual Agreement Procedure (MAP) / Advance Pricing Agreement (APA) meeting between India and USA was held in Washington DC, USA during the last week of October, 2016. The discussions in the meeting were focussed on resolving MAP cases pending for a long time and to achieve significant developments in Bilateral APA Process.

During the meeting, 66 MAP cases relating to Transfer Pricing issues and 42 MAP cases relating to Treaty Interpretation issues were agreed to be resolved successfully. The total amount that was locked-up in dispute in these cases is approximately Rs.5,000 crore and these cases were related to Assessment Years ranging from AY 1999-2000 to AY 2011-12. The resolved cases pertain to various issues like transfer pricing adjustments made to the international transactions in the nature of Payment of Royalty, Payment of Management Fees, Cost Contribution Arrangements, Engineering Design Services, Contract R&D Services, Investment Advisory Services, Marketing Support Services, Software Development Services, IT enabled Services (both BPO and KPO services) etc. and treaty interpretative issues in the nature of Presence of Permanent Establishment (PE) in India and Profit Attribution to such PEs, disputes pertaining to royalty income v/s business income of foreign companies, etc.

Further, during the meeting, the two Competent Authorities reached an agreement on the terms and conditions of the first ever Bilateral APA involving India and USA. Though India started its Bilateral APA process with the USA by accepting applications from the Indian taxpayers from FY 2012-13, the USA started its Bilateral Process with India only in February 2016 by way of accepting applications from US taxpayers. Within a short span of 8 months, the Agreement has been reached upon in the first ever Bilateral APA involving India and USA.

The speedy resolution of cases and agreement on Bilateral APA due to effective mechanism of development of mutual trust and cooperation between the Competent Authorities of two countries would really be a positive factor in creating a conducive atmosphere for investments and business by US Companies in India.

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Moodys Affirms Indias Baa3 Rating; Maintains Positive Outlook
Nov 17,2016

Moodys Investors Service (Moodys) has affirmed the Government of Indias Baa3 issuer and senior unsecured ratings and maintained the positive outlook on the rating. Moodys has also affirmed Indias P-3 short-term local currency rating.

The decision to maintain a positive outlook on the Baa3 rating rather than assigning a stable outlook to the rating at either Baa3 or Baa2 reflects two drivers:

- Economic and institutional reforms introduced since the positive outlook was assigned, and potentially forthcoming, continue to offer a reasonable expectation that Indias growth will outperform that of its peers over the medium term and that further improvements in its macro-economic and institutional profile will be achieved.

- However, the reform effort to date has not yet achieved the conditions that would support an upgrade to Baa2, in particular in accelerating private investment to support high, stable growth, without which the governments debt burden -- a key constraint on the rating -- is likely to remain high for a sustained period.

RATINGS RATIONALE

Moodys assigned a positive outlook to Indias Baa3 rating in April 2015 to reflect our view that Indias policymakers were establishing a framework that would likely allow the countrys growth to continue to outperform that of its peers over the medium term, and improve its macro-economic, infrastructure and institutional profile to levels commensurate with a higher rating.

Having assessed progress made since then, Moodys conclusion is that important steps have been taken to strengthen Indias institutions. However, thus far, the policy effort has not delivered a sufficiently clear prospect of the reform dividends -- sustained, high growth and the promise of a reduction in the countrys debt burden -- to support an upgrade.

Moodys still expects that the measures taken to date, together with further reforms, will in time achieve those objectives and support an upgrade to Baa2. However, a further period is needed to assess how the reform program will evolve and the likely impact of recent and potential future reforms on growth and, over time, on Indias debt burden.

RATIONALE FOR MAINTAINING THE POSITIVE OUTLOOK

The positive outlook denotes Moodys expectation that, over time, Indias credit metrics will likely shift to levels consistent with a Baa2 rating. In particular, the outlook reflects our expectation that continued policy reform implementation will allow balanced growth to support a reduction in the government debt burden, currently a constraint on Indias rating.

A broad range of policies have been implemented that are conducive to moderate inflation and limited current account deficits. In addition, a number of policy reforms, if effective, would lead to higher investment and more efficient savings.

In particular, the passage and ongoing implementation of a range of economic reform measures, including the Goods and Services Tax and reform of the bankruptcy code, points to improvements in government effectiveness. This assessment is also supported by higher rankings in the World Economic Forum Global Competitiveness Index and World Bank Worldwide Governance Indicators.

Thus far, private investment has not picked-up in response to the governments measures, denoting limited policy effectiveness. Investment has been constrained by high leverage in some sectors, a relatively unfavorable global environment and, in some cases, limited access to finance. Businesses are also likely to have opted to wait for more certainty about the tangible implications of reforms on their operating environment.

Policy reforms are still relatively recent with material uncertainty about the effectiveness of measures already implemented and whether momentum will sustain. The coordination and alignment of objectives between different parts of the government and the private sector poses implementation challenges.

RATIONALE FOR AFFIRMING THE Baa3 RATING

Indias core credit strengths are its size and growth potential, which are amongst the highest of Moodys-rated sovereigns and provide key support to its Baa3 rating.

Low incomes constrain Indias sovereign credit profile by limiting the governments revenue base and adding to its social and development spending requirements. However, incomes are growing. GDP per capita in India was 11% of the US levels on a Purchasing Power Parity basis in 2015 -- still well below the level in other Baa-rated sovereigns. But this level marks an increase from 6.6% of US levels in 2005 and 9.2% in 2010.

In an environment of lackluster global trade which we expect to continue, Indias very large domestic markets provide a relative competitive advantage compared to other, smaller and more trade-reliant economies.

As the economy shifts towards higher value-added and higher productivity growth, incomes will continue to rise faster than in most other economies. Combined with the very large size of the economy which prevents high concentration and hence vulnerability to sector-specific shocks, higher incomes will bolster economic resilience.

Indias significantly reduced and now very low external vulnerability also contributes to resilience by sheltering the economy from abrupt changes in financing conditions. The marked narrowing of current account deficits, to around 0.5-1.5% of GDP, from as high as nearly 5% of GDP in 2013 is partly accounted for by the lower cost of energy imports and policy measures that have dis-incentivized gold imports, which would outlast fluctuations in commodity prices.

Together with marked increases in Foreign Direct Investment, which now provides full financing of the current account deficit, this indicates limited external vulnerability.

However, India continues to display a number of features which constrain the credit rating.

First, year to year, incomes and consumption remain more vulnerable to negative shocks than in other Baa-rated sovereigns. With low per capita incomes at around $6,000 on a PPP basis limit, households have very limited capacity to absorb negative income shocks, whether domestic, external or weather related.

For instance, monsoon rains are critical for Indias agricultural sector given that almost half of the countrys farm land is not irrigated. Half of Indias overall consumption comes from rural sector and a major portion of rural incomes is dependent on agriculture.

In addition, the governments debt burden is high and is likely to remain so for some time. Room to reduce the deficit quickly is limited. Wages and salaries account for about 50% of total expenditure with a large, once in 10 years, increase in central government compensation just implemented. The shift towards cash-based benefit transfers, if effective, will help reduce some of the current inefficiencies of current spending. However, more rapid cuts in spending for instance through reductions in public investment outlays compared to current plans would have a negative economic impact.

Meanwhile, on the revenue side, Indias large low-income population limits the governments tax revenue base. At 20.9% of GDP in 2015, general government revenues were markedly lower than the 27.1% median for Baa-rated sovereigns. Although the implementation of GST and other measures aimed at enhancing income declarations and tax collection will help widen and boost revenues, the effects will only materialize over time and their magnitude is uncertain so far.

As a result, the general government deficits will remain sizeable and any reduction in Indias government debt burden will largely rely on robust nominal GDP growth. We expect that the debt-to-GDP ratio will hover around the current levels, at 68.6% in 2015, before falling gradually as nominal GDP growth is sustained and revenue-broadening and expenditure efficiency-enhancing measures take effect.

The banking sector also continues to pose material contingent liability risks to the soverei

Borrower Overleverage Warrants Course Correction from MFIs
Nov 17,2016

India Ratings and Research (Ind-Ra) says that if money flow does not fully normalise by 4QFY17, Tier 1 capital of few microfinance institutions (MFIs) could near regulatory minimum levels. Ind-Ras analysis indicates that a section of joint liability group (JLG) borrowers could be overleveraged. Moreover, overcrowding of MFIs in some highly penetrated states may adversely affect MFIs asset quality, especially with low growth in new-to-microfinance borrowers.

Demonetisation to Inculcate Banking Habits Once Short-Term Liquidity Pressure Eases: The agency expects MFI borrowers to reprioritise their expenses on account of a cash flow mismatch in the next few weeks. This would lead to an increase in one-month overdues of many MFIs. If money flow does not fully normalise by 4QFY17, Tier 1 capital of few MFIs could near regulatory minimum levels. Ind-Ras analysis indicates that most MFIs have liquidity in the form of unencumbered cash and unavailed bank lines to meet debt obligations for 30-60 days in the event of business disruption. The agency expects banking habits to improve in the long term, as currency flow resumes.

Borrowers Leverage Approaching Serviceability Limits: In Ind-Ras opinion, a typical two-income JLG borrower household could service INR50,000-INR60,000 of debt in over two years. The peak leverage of a section of JLG borrowers is approaching these levels. In 1HFY17, the level of the real income growth of rural borrowers was almost the same as the rural consumer price index, indicating that the ticket size growth rate of existing borrowers should moderate to contain the impact of borrowers rising leverage.

The growth in the gross loan portfolio (GLP) of MFIs in nine of top 10 states was driven more by an increase in ticket size than by a rise in penetration (clients serviced per branch). This indicates an uptrend in leverage in these states. Wage rate-based annual income to annual EMI ratio stands at 1.8x-2.0x for the highest leveraged states such as Karnataka, Madhya Pradesh and Odisha and at 5x for the lowest leveraged states such as Kerala.

Rising Risk of Unreported Multiple Borrowings in Some States: Ind-Ra believes that the continued focus of MFIs on some of the highest penetrated states such as West Bengal, Kerala, Tamil Nadu and Karnataka has increased the risk of unreported multiple borrowings in such states. Hence, the chance of a surge in delinquencies is high in these states. The agencys analysis of penetration indicates that West Bengal is the highest penetrated state, followed by Kerala, Tamil Nadu and Karnataka.

Steady Rise in Delinquency Indicates Stress in Some Regions: Ind-Ra believes that the percentage of one-month overdue loans (portfolio at risk greater than 30 days (PAR >30)), as reported by MFIs, underestimate the actual default rate of borrowers because of the base effect. The currently reported PAR > 30 numbers have become artificially low because of the accelerated growth registered by MFIs last year. Ind-Ras estimate of PAR > 30 for end-1QFY17, based on the base of the disbursement in 1QFY16 and 2QFY16, indicates that PAR > 30 crossed 1% in Karnataka and Uttar Pradesh, and is in fact close to 2% for Gujarat.

Nine of Top 12 MFIs Need Higher Capital to Account for Low-Quality Geographical Mix: Five of the top 12 MFIs analysed by Ind-Ra have low geographical diversification and are exposed to regions with high default expectations. These five MFIs had a GLP of INR96bn at end-1QFY17. Four MFIs, with a GLP of INR181bn, have granular geographical distribution and are present in regions with low default expectations. Based on the geographical diversification and riskiness of the covered geographies, the current capital levels of nine MFIs may be inadequate to cover extreme portfolio stress, a requirement for higher rating levels.

Idiosyncratic Risk Keeps Spreads Commanded by MFIs Wider Compared With Similar-Rated NBFCs: The weighted average credit rating of MFIs improved to A- in FY16 from BBB- in FY14; however, the spreads commanded by similarly rated NBFCs over 10-year government securities are tighter than those commanded by MFIs. In Ind-Ras assessment, the key reason for the non-convergence of spreads is the high idiosyncratic risk faced by MFIs due to the socio-political importance of their borrowers.

Credit Assessment and Operational Practices Need to be Tightened: The agency believes that interpretations of the two MFI lender norms, low correlation between borrower cycle and ticket size, among other practices, could result in adverse borrower selection. The key examples of operational lacunae are non-verification of Aadhaar, involvement of agents due to portfolio build-up pressure and prepayments leading to faster introduction of borrowers to higher ticket size.

JLG Loans to Remain Mainstay; Product Development Key to Growth: The microfinance portfolio of all MFIs stood at INR670bn in FY16 compared with INR227bn in FY11, with penetration (non-unique borrowers) increasing to 32.5m from 17.6m. The sector receives regulatory support and preference for financial inclusion (8 of the 10 SFBs approved were MFIs). Ind-Ra opines that MFIs are likely to play a pivotal role in providing the large informal income segment, with estimated credit demand of INR 10trn, access to formal financing, and this may, in turn, provide MFIs new avenues for future growth by designing new products for this segment.

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